The Board of the National Bank of Ukraine has decided to cut the key policy rate from 8% to 6% effective 12 June 2020. This is the lowest level of the key policy rate since Ukraine gained its independence.
Inflation in April–May hovered around 2%, being lower than expected and below the target range of 5% ± 1 pp.
Further on, inflation will grow moderately, albeit likely heading towards the target range more slowly than expected.
First, consumer and investment demand remain subdued, although business activity has started to pick up gradually as the quarantine restrictions are eased. Second, the FX market, which has a major impact on the price of the basket of goods, is favorable for low inflation. Since the start of April, the supply of foreign currency on the interbank market has exceeded demand. Imports of goods remain below pre-crisis levels across almost all categories of goods, while exports are declining more slowly. As a result, the hryvnia strengthened and since early April the NBU has used this opportunity to purchase around USD 1.8 billion in order to increase international reserves. Third, inflation expectations are improving among households and financial analysts.
At the same time, the NBU’s key assumption of continuing cooperation with the International Monetary Fund has realized.
On 9 June, the IMF Executive Board approved a new cooperation program with Ukraine – an 18-month Stand-By Arrangement amounting to USD 5 billion. These funds would fully finance budget expenditures on counteracting the negative effects from the coronavirus pandemic and quarantine restrictions.
In addition, it is critically important to continue structural reforms and to maintain a prudent macroeconomic policy. Given the expectation that inflation would be below its target for a longer period of time, the NBU Board cut the key policy rate by 2 pp, to 6%. The NBU has also decided to narrow its interest rate band on standing facilities, from the key policy rate +/- 2 pp to the key policy rate +/- 1 pp.
This means that with the new key policy rate, overnight refinancing loans will be issued at 7%, and overnight certificates of deposit will be placed at 5%.
A decrease in the key policy rate below its neutral level indicates the end of the cycle of rapid monetary policy easing.
